What’s dangerous about disruption

The danger of disruptors and disruption is quite simple- they don’t care about your industry and have nothing to lose if they destroy it or you or even their own innovative new business. That’s dangerous competition.

Lets have a quick recap about how Christensen thought disruption works.

ANDREW A. KING AND BALJIR BAATARTOGTOKH How useful is the theory of innovation? Sloan Mgmt Review fall 2015

As I mentioned last week, Amazon disrupted the bricks and mortar book selling and distribution industry and completely destroyed both the existing business model as well as severely impacted all those who were a part of this industry.

Retailers like Borders who stocked books, paid authors and publishers a relatively high price, provided a place for book buyers to gather and browse books. They looked for ways to grow their network of stores into more and more places as a spur for growth, hiring more people, they sought to identify ways to increase industry profitability and share this with authors and publishers. They sought to increase the “fun”aspects of searching for books by adding coffeeshops and cafes in-store, hiring more people, inviting customers in with free wifi, or special talks by authors and book signings … high-value add-ons that their regular customers seemed to like. For these retailers assets such as bricks and mortar or inventory were typically 30% of sales,

Borders strategy was outflanked by Amazon’s disruption- fingertip access via the web (anytime any place with a connection) with significantly lower prices (often well below Borders purchase price), significantly wider varieties of books, but delivered to your door maybe within a week. Without physical stores, and lacking heavy inventory, Amazon had less that 5% of sales tied up in assets. So Amazon was able to disrupt both by paring down the offer to customers- online book purchase, no cafes, no wifi, no book signing- and offering a significantly lower price. In addition to Christensen’s four steps, Amazon’s disruption was supplemented by the legacy costs of the Borders bricks and mortar stores and extensive staff, the better economies of scale of a few large warehouses with few staff and later increase in scope to offer more to customers than just books. Government influence in Amazon’s accidental exemption from state sales tax initially enabled them to lower prices even further.

But it wasn’t just price that disrupted Borders… Amazon actually delivered a great (if different) customer experience compared to other retailers.

Amazon #1… Borders well done the list

And this resulted in the following sales performance for Borders.

Amazon vs Bricks and Mortar 2002-2014

This disruption had wider ramifications beyond Book retailers closing.

Borders workers were left without jobs. Publishers were caught off guard by Amazon demanding cheaper prices from them, and they squeezed authors to accept lower fees. Amazon’s sales tax exempt business model also reduced the tax takes of many US states, along with lower income and business taxes from fired workers and closed Borders stores.

Amazon’s business model also had a significant impact on its shareholders by offering them no profits on their increasing investments. The only way an Amazon shareholder can materially benefit in owning Amazon shares is to sell them. Or you can wait another 10, 15 years to maybe make a profit.

And having disrupted book retailing, Amazon took the same business model- compounded by not having to make a profit- into every retail sector they could.

Along the way bullying suppliers to sell below cost to subsidize Amazon’s “wrecked” business model, driving many small suppliers into bankruptcy and their workers into unemployment.

Oh, if only everyone had an investor that didn’t need to make a profit and who were willing to continue to invest in the business in the hopes of generating a return.

Quite clearly Amazon doesn’t care about any retail industry or any retailer or any supplier, or any government. They care about themselves and how they can persuade customers to use their service more and more.

The logical outcome is Amazon sourcing everything from the absolute lowest cost places in the world, but only selling to those who can afford their products in the west. Except, bankrupting retailers and suppliers and making workers unemployed doesn’t really help sales. And when there are no more competing retailers well, Amazon will be free to use their monopoly power to raise prices.

(Yes, I use Amazon, so I, too, am to blame)

So what’s dangerous about disruption- a business that doesn’t care about you, your business or your industry.

Value-adding Innovators within your industry have a vested interest in maintaining the status quo with their innovation driving value adding share growth and teaching customers how to pay more for their purchases.

Typical disruptors, it appears, would be quite happy to sell at a loss for a considerable period of time. Shareholders it seems in the current low return world are happy to support this. In the meantime you and your fellow incumbents are left fighting over a diminishing number of high value customers who may just move to the disruptor because of price.

OK, I think I have painted quite a clear picture of the danger of disruption in your industry, so how really does this happen and what can we do about it. See you next week.